ORAL STATEMENT BY CHAIRMAN ARTHUR LEVITT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
BEFORE THE SUBCOMMITTEE ON SECURITIES
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
APRIL 6, 1995
Chairman Gramm and Members of the Subcommittee:
I appreciate this opportunity to testify on behalf of the
Securities and Exchange Commission regarding proposals to reform
the system of private litigation under the federal securities
laws. Mr. Chairman, I begin by noting that, although I find
myself in the middle of one of the most contentious debates over
legal remedies in our nation's history, I am not a lawyer.
But in this case, that may be as much an asset as a
liability. My background is in business, and while I cannot
address the fine points of legal history and court decisions that
end up providing much of the fodder for this debate, I can speak
to the practical impact of our system of litigation.
I've managed enterprises in fields as varied as finance,
agriculture, and publishing. I've built small businesses into
large companies. I know the punishing costs of meritless
lawsuits -- the time, the money, the anxiety.
My experience on the boards of more than a half-dozen major
public companies may also be instructive. In each case, my
procedure was to make sure that the company had sound management,
the board members had good reputations, and the company insured
its directors. These questions arose from a healthy concern
about liability -- and indeed, the private right of action served
those companies well by reinforcing the conscientiousness of
their directors.
But there's another side to the story: There's the dozen or
so entrepreneurial firms whose invitations I had to turn down,
because they could not adequately insure their directors. Some
of these companies later turned out to be huge successes, and
some of them failed. While I like to think I would have made
some small contribution had I served those firms, countless
colleagues in business have had the same experience, and the fact
that so many qualified people have been unable to serve is, to
me, among the most lamentable problems of all.
Mr. Chairman, I've seen many charts that try to prove a
point about our litigation system -- charts that show there is a
crisis, charts that show there is no crisis; charts that show an
explosion in litigation, and charts that show no explosion. But
from a businessman's perspective, the most important chart of all
is one we'll never see, and that is a chart of the opportunities
missed, the knowledge and experience not applied, the companies
whose growth was hindered, and the enterprises that folded or
never were -- all because of the fears and flaws connected with
our litigation system. These flaws are magnified in their effect
on entrepreneurs and professionals.
We've wasted too much time on the wrong question, "Is there
a crisis?" The right question is, "Can the system serve our
nation better?" The answer to that is a resounding "Yes."
The SEC has a clear interest in this issue. Private rights
of action are fundamental to the success of our markets; they are
an essential complement to the SEC's enforcement program; and
they play a significant role in helping to ensure full and
complete disclosure. The Commission must oppose any measures
that would eviscerate investors' legitimate remedies against
fraud.
But at the same time, there is no denying that there are
problems in the current system -- and that investors, markets,
and corporations are being hurt by these systemic flaws. We must
do something to reduce the excessive costs of a litigation system
that threatens the vitality and competitiveness of the U.S.
economy.
I've made it clear that the SEC will work with any group,
examine any idea, entertain any proposal, and consider any
perspective, if it will help resolve this contentious issue
without compromising investor protection. Over the last year,
I've conducted a form of shuttle diplomacy with all parties to
the debate -- the National Association of Manufacturers,
representatives of the plaintiffs' bar, the state securities
administrators, the AICPA, the AARP, investor rights groups,
federal judges, the SEC's Consumer Affairs Advisory Committee,
corporate executives, and countless others -- trying to move the
dialogue along.
The Commission supports a number of measures designed to
eliminate abuses in class action lawsuits, and I'm more convinced
than ever that in these areas, a consensus can be reached.
Virtually all parties seem to agree with us that lawyers should
not pay referral fees to brokers who refer clients; that named
plaintiffs should not receive bounty payments; that we need to
set a class organization period or some other method of
eliminating the "race to the courthouse"; that disclosure to
class members must be improved; and that private plaintiffs'
legal fees should not be paid out of SEC disgorgement pools.
Most parties also concur that civil RICO charges in securities
fraud cases, and their treble damages, should be prohibited.
The Commission believes that meaningful improvement to the
existing system can be accomplished through a combination of
legislation, increased judicial activism in the case management
process, and the Commission's use of its own rulemaking and
interpretative authority. Any revisions of the law clearly
should not apply to SEC enforcement actions, which, if anything,
would rise in importance to the extent that private action is
modified.
In terms of our own rulemaking, the Commission is already in
the process of reviewing the adequacy of the safe harbor
protections we grant companies for their disclosure of forward-
looking information. This action alone could have significant
impact on litigation practices; we hope to issue a proposal soon.
We will file amicus briefs in support of motions to dismiss, or
requests for sanctions under Rule 11. We've also created a
Litigation Analysis Unit in the Office of the General Counsel.
Turning now to legislation, we were concerned with some of
the provisions in H.R. 10, the first securities litigation reform
measure introduced in this Congress. While H.R. 1058, the
measure that passed the House, was an improvement, we still have
significant concerns about some of its provisions. I view S.
240, the legislation introduced by Senators Domenici and Dodd, as
a positive step toward improving the private litigation system.
To a large degree, I am in accord with the objectives of S.
240, as well as a significant number of the measures chosen to
accomplish them. I urge all of us to work together to make
certain improvements in the bill, including:
* the adoption of the Second Circuit's pleading requirement,
that plaintiffs plead with particularity facts that give
rise to a "strong inference" of fraudulent intent by the
defendant;
* the restoration of aiding and abetting liability;
* the adoption of an expanded statute of limitations that is
not limited by a "should have been discovered" clause;
* the inclusion of specific language that confirms the
Commission's authority to provide a "safe harbor" for
forward-looking information; and, finally,
* the adoption of the Sunstrand definition of recklessness.
Let me add that I am aware of the bill introduced earlier
this week by Senators Bryan and Shelby; while I have not yet been
able to examine it in detail, it evidently represents a
thoughtful approach to the problem. Commissioner Roberts, who
has examined the bill, does endorse that legislation.
Mr. Chairman, both the Commission and the Congress recognize
the dangers that flaws in the existing system pose to investors,
to companies, and to our nation. We've come a long way toward
crafting thoughtful legislation to address the problem, and we're
down to the last five yards. It would be a happy circumstance
for the nation if the Commission and the legislative and
executive branches moved together to achieve a bill that protects
investors and corrects problems in the litigation system. For my
part, I have no doubt that, if we continue to work together, we
can and will score a victory for all Americans.
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